Iraq’s Oil Ministry and KRG Hold Talks on Oil Export Schemes

14 October 2008

Iraq’s oil ministry and the Kurdistan Regional Government (KRG) have held talks in recent weeks that could pave the way to export oil produced in the northern region by international oil companies. They could also possibly open the way for an agreement between the federal government and the KRG on the contested production sharing contracts awarded by the KRG in recent years, Iraqi sources said

In the initial talks, the two sides aim to reach an agreement on the technical issues for exporting oil, produced by Norway’s DNO from the Tawke field and a consortium of Genel Energi and Addax Petroleum from the Taq Taq field, through facilities controlled by the ministry. The recent talks focused on connecting Tawke’s production facilities to the Iraq-Turkey pipeline at the Kurdish border town of Fish Khabor, and linking the Taq Taq facilities to North Oil Co. infrastructure in Kirkuk.

DNO started production from Tawke last year at a modest 11,000 barrels per day but full field development will be able to deliver some 120,000 b/d. About 12 wells have been drilled so far, and first phase production facilities have been completed to cater for 50,000 b/d to be followed by full field development. DNO is entitled to 55% of the field’s output as per its stake in the contract.

Taq Taq is an old oil field discovery with estimated proven reserves of some 366 million barrels that is currently being appraised by the foreign operators. Early production facilities currently have a 10,000 b/d capacity, but total production from the first phase could reach 50,000 b/d and the field could deliver up to 125,000 b/d when fully developed in the next few years.

DNO said last month that it has been authorized by the KRG to complete infrastructure work for export, signaling a possible agreement with Baghdad. A 42 kilometer link to the Kirkuk-Ceyhan pipeline has been completed but has yet to be tied-in to the main export pipeline.

The recent talks were held in Irbil and Baghdad between technical staff from the ministry and KRG. However, any agreement would require the endorsement of Iraqi Oil Minister Hussein al-Shahristani, and possibly the government in Baghdad. But ministry sources said any technical deal on oil exports would have to be backed by a political deal between the two sides, including on the fate of the contracts signed by the KRG which the ministry declared illegal.

The position in Baghdad is that State Oil Marketing Organization (Somo) has the exclusive right to export crude produced from any part of Iraq on behalf of the government. Exports of crude from northern Iraq via Turkey are regulated by a state-to-state agreement and only the federal government can formally export crude via Turkey.

Until now, KRG’s oil production has been marketed locally to topping plants in the north using truck loading facilities built by the companies. However, the domestic market in the Kurdish region is unable to absorb the full output of the two fields, some 250,000 b/d once fully developed. A further 3,000 b/d of condensate, rising later to 15,000 b/d, will also be added from the Khor Mor gas field currently being developed by the Sharjah-based Dana Gas.

Commercialization of the early production is vital for foreign companies who invested in the Kurdish region to recoup their investment in the form of cost oil and profit oil under the signed production sharing deal. As a result, pressure is building on the KRG to find solutions to be able to pump the region’s output onto international markets, and a deal with Baghdad seems the only viable option. That explains the KRG’s move to initiate talks in an attempt to reach a pragmatic solution to the trapped oil problem, sources close to the talks said.

The allocation of the foreign companies’ share of the crude oil under the production sharing agreement, possibly at the export terminal, will also have to be coordinated with Somo. Sources in Baghdad say that would add to the ministry’s leverage as contracts signed by the KRG would have to be approved by the federal government before the foreign companies’ share of oil is lifted. Under the current setup, all oil proceeds from Iraqi crude exports are paid into the Development Fund for Iraq, which is supervised by the United Nations.

By Ruba Husari, London

(Published in International Oil Daily Oct. 14, 2008)

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